Like I promised, STRATEGY MANIA! #1493892

"The story of banking is that it is a magic trick for transmuting risky assets into safe liabilities.""The story of banking is that it is a magic trick for transmuting risky assets into safe liabilities."

Out of the handful of considerate, high-level definitions of banking out there in the econ literature, this is my favorite. A risk-bearing entity (well, in fiatland not so much...) sitting in between risky economic investments and safe, money-like assets (= liabilities for the bank).

A bank lends money to companies and homeowners, which is risky (they might not pay back the money). The bank gets the money by issuing deposits, which are safe. A $1 deposit at a bank should always be worth $1. There are various problems with this magic trick; those problems are the main theme of this column, and of financial history generally

the magic trick exists for a reason: This transmutation increases society’s capacity to take productive risks.

I disagree with that judgment, though only with the word "productive": basically, banking is a way to fool society into taking larger financial risks than it wants to... (Lyn Alden had a great quote back in the bank runs of 2023 about how grandma thinks she has "money in the bank" but actually she has a leveraged Argentinian bond portfolio with some payment services on the side — bonus zaps to whoever can find it for me)

On a deeper philosophical level, this is precisely why a lot of Rothbardian/hardcore sound money people think of banking as fraud: you're literally DECEIVING customers (not literally, because contracts... which nobody reads or understands) by saying funds are there and safe while _also_ investing them in risky ventures.

Lots of people would rather keep their money safe in the bank. If the bank uses that money to make risky investments, then everyone is happy: The people who want their money safe in the bank feel safe, but the risky investments that create economic growth still get made

WHERE STRATEGY COMES INWHERE STRATEGY COMES IN

Bitcoin is, let’s assume, a risky asset. Some people want to buy Bitcoin, because they want that risk: They think Bitcoin will go up, they want to own it when it goes up, and in exchange they are willing to take the risk that it might go down. Other people do not want to buy Bitcoin, because they do not want that risk. They want to keep their money safe in the bank.

I said as much in my treasury company long read last year (#1081555). Not sure why this framing and phrasing of being a (central?!) bank hasn't caught on.

Essentially Strategy is issuing dollar-denominated one-month financing (at 11.5%!) designed to always pay back par, and using that financing to buy a big chunk of all the Bitcoins that are for sale. So that’s neat!

Schematic and Strategy outline:

You might think: “If people put their money somewhere safe, like a bank deposit, and then the bank invested the money in Bitcoin, that would make everyone happy. The people with money would feel safe, but also Bitcoin would go up. The magic transmutation of banking increases society’s capacity to take risk on Bitcoin. There will be more productive investment in Bitcoin, because of this magic.”

Strategy is like a fiat bank "deceiving" (again, not literally) its financiers to take larger risks than they're comfortable with.

crypto has, over the years, created all sorts of “shadow banks” to do some form of this trade: They take money from depositors, promise the depositors their money back whenever they want it with interest, and then use the money to make speculative crypto investments.

Oh well. We all know how this ends (not actually...) #1485116, #1477917